Recession recovery track: a U or a V?

In the last recession America faced, we had a pad on which to bounce-off. With the housing industry beginning to boom consumers were tapping into their home equity as the technology sector suffered. Credit was also readily available and employment was low.

The strength of the dollar and relatively low federal deficit, coupled with the psychological effects of a new administration favorable to cutting taxes and fiscal restraint (the latter of which did not occur) resulted in a shortened recession – a “V” shaped recovery track.

Conventional wisdom holds the economy will have a “U” shaped recovery track, as the housing market continues to suffer from falling property values and the dollar’s recent weak performance.

The markets even the day after the election are reacting and businesses are preparing for an Obama Administration.

The Heritage Foundation has calculated that in 2008 Congress enacted $332 billion of "emergency" supplemental spending bills, only half of which was for the Iraq war. And Democrats in Congress are preparing for $150 billion to $300 billion in new spending.

Small businesses, which create nearly 80% of the new jobs in the American economy, won’t fair well under Barack Obama’s proposal to send the bulk of their job-creating profits to Washington.

Office of Advocacy at the Small Business Administration has reported that since the mid-1990s, the small business sector has created 78.9% of the net new jobs in the United States. Sen. Obama is claiming his proposed tax hike on incomes over $250,000 will hardly stifle job creation in this key job-producing sector because "98% of small businesses make less than $250,000."

But Obama arrives at his 98% figure by lumping firms with no employees, the majority of small businesses, with small businesses that have 50 or 100 employees (SBA's Office of Advocacy reports that 52% of small businesses in the U.S. economy are home-based). Census data show that 79% of all American companies, counting both large and small firms, have no employees.

What-is-more the tax rate on the lion's share of small business income could reach 54.9% under a President Obama. The individual top rate will climb from 35% to 39.6% and the Social Security/Medicare tax rate could climb from 2.9% to 15.3%. Put those together and you get 54.9%.But it’s not just small business or Wall Street that is worried, Dolphins owner Wayne Huizenga recently said of Obama, "He wants to double the capital gains tax, or almost double it."

A higher capital-gains tax, along with the proposed income tax hike would surely delay the recovery as raising taxes have historically resulted in less revenue to the Treasury and burden small business.

Moreover, the government bailout interloping and uncertainty ought to insure a slow “U” shaped recovery track at best.